Blumbergs Professional Corporation is involved with many charity applications each year. In this series, CRA Charity Application Graveyard, we aim to provide groups considering charitable status applications with insights into common issues the CRA encounters, based on our analysis of access to information documents, CRA letters, and the CRA’s Charities and Giving website. These reasons given in the Charity Application Graveyard are not presented in order of importance.
CRA identifies the following issue:
Financial transactions with directors
The courts in Vancouver Society of Immigrant and Visible Minority Women v MNR, [1999] 1 SCR 10, have held that a fundamental principle of charity law is that all organizations that want to be registered as a charity under the Act must make sure their purposes are directed toward the benefit of the public. Public benefit involves two requirements:
- a measurable benefit must be given
- the benefit must be given to the public as a whole or a sufficient section of the public
The applicant is responsible for proving the public character of the benefit. It is not enough for an applicant to merely say that its programs will benefit the public as a whole. Rather, it must clearly say who will benefit from its programs. An organization that gives a private benefit cannot be registered as a charity. A private benefit occurs when an organization’s programs and services do any of these:
- help specifically named individuals or organizations
- offer benefits to a limited group of people based on criteria that are not connected to the organization’s purposes
- promote the interests of individuals involved in private businesses
When an applicant chooses to enter into financial, real estate, or other types of transactions with its officials, we have to figure out if those officials will benefit from the transactions. If they do, we then have to figure out whether the benefit is incidental and a necessary result of carrying on a charitable activity.
The applicant has not shown that any benefit resulting from the transaction with its official is incidental and a necessary result of carrying on its charitable activities. To show this, the applicant should give us information that answers these questions:
- How much rent is the applicant being charged? How is the rent calculated?
- What portion of the house or property is the applicant renting (percentage of space used)?
- What percentage of the time will the property be used for the applicant’s activities?
- What is the cost of operating the entire house or property, and how does it compare to the rent being charged?
- What are the utility costs (for example, phone, heat, hydro)? What part of this cost does the applicant pay?
- Has the applicant entered into a leasehold agreement? If so, what provisions were made to deal with any leasehold improvements it makes to the property? Include a copy of any leasehold agreement with your response to this letter.
- Is the property open to the public when the applicant is carrying on its activities? How does the public know that the applicant carries on activities there?
Without this information, we cannot conclude that the applicant meets the public benefit requirement. For more information on meeting this requirement, go to canada.ca/charities-giving, select “Registering for charitable or other qualified donee status” then, “Policies and guidance” and see Guidance “Guidelines for Registering a Charity: Meeting the Public Benefit Test, CPS-024.”
The CRA’s concern with respect to financial benefits to directors is based on their interpretation of the Income Tax Act. In fact, there are also common law requirements that might be stricter than the CRA interpretation above and may need to be followed. For example, you can look at the Ontario Public Guardian and Trustee and their position on payments to directors when it is not for reimbursement of reasonable out-of-pocket costs. In general, you are better off not having any arrangements between directors and the charity where the directors may get a benefit. It is also not just a legal issue but an ethical and reputational issue as well.
Not everything is charitable, and sometimes, for some groups, depending on what they want to accomplish and what their sources of revenue are, it may not even be desirable to be a registered charity. One thing is clear – CRA spends a lot of time and resources reviewing charity applications, and unless your application meets all of the charity law requirements under the Income Tax Act and common law, they will not be able to register your organization as a charity.
If you require assistance with your charity application, you may be able to retain our law firm, and you can contact us here. It is best to contact us before establishing the entity and making an application to CRA, as this will minimize costs, changes and delays.